Claims Data Send Recession Signal

First-time jobless claims jump above 400,000, a strong indicator of recession, but the ISM services index offers some hope for the economy

by BW, Standard & Poor's, and Action Economics Staff

One day after Federal Reserve Chairman Ben Bernanke raised the possibility of a "slight contraction" in the U.S. economy, a report on first-time unemployment filings issued an even stronger recession warning on Apr. 3. But another report issued the same day offered some encouragement for the services sector, a vital component of the U.S. economy.

U.S. first-time jobless claims surged 38,000 to 407,000 in the week ended Mar. 29, from 369,000 the week before, marking their highest level since September, 2005. Markets expected a much smaller increase to 370,000.

The four-week moving average rose to 374,500 from 358,750. Continuing claims jumped 97,000 to 2,937,000 in the week ended Mar. 22, from 2,840,000 the week before, pushing the insured unemployment rate up to 2.2%, from 2.1% the week before.

Bear Stearns (BSC) economist John Ryding wrote in an Apr. 3 note, "Though the Labor Department stated that the shift in the timing of Easter made jobless claims difficult to seasonally adjust, there does not appear to have been a tendency in prior years for Easter to have boosted initial claims."

Ryding says a jobless-claims reading above 400,000, if sustained, is "a very strong indicator that the economy has fallen into recession."

Services Index Up Slightly

"Today's reported surge in U.S. initial claims in the last week of April is a potential game-changer for the U.S. outlook, and it has shifted the risk profile" for the March employment report, says Action Economics. "Downside surprises in tomorrow's jobs data, combined with today's claims figures, would confirm that the U.S. economy has entered a recession."

The Institute for Supply Management's U.S. nonmanufacturing composite index inched up to 49.6 in March after rising nearly 5 points to 49.3 the month before, about as expected by economists. The survey's business activity index rose to 52.2 from 50.8 in February. Employment held at 46.9, while new orders rose to 50.2 from 49.6. Prices paid rose to 70.8 after falling to 67.9 in February.

"This measure, as well as Tuesday's ISM [manufacturing index] reading of 48.6, imply sluggish but still positive growth in the economy," according to Action Economics.

The ISM services report "is consistent with our view that the economy has decidedly slowed and has likely fallen into only a mild recession," wrote Lehman Brothers (LEH) economist Michelle Meyer in an Apr. 3 note. "As with previous recessions, the services component of the economy should weather the slowdown better than manufacturing or construction."

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